How Do I Set up a PTO Policy?

A warm breeze, a thick coat of sunblock, and time spent with the people you love. For many folks, that’s PTO in a nutshell, er, coconut. Those three letters stand for “paid time off,” and they’re basically any kind of day where employees get paid not to come into work. And PTO can have many different stripes, including sick days, vacation days, and holidays.

The question is, how do you design a PTO policy that lets your team collect and use those hard-earned days off when and where they need it? In this article, we’ll explain everything you need to know about the three little letters we call PTO.

First off, do I need to offer PTO?

Strangely enough, you don’t. There aren’t any laws that tell companies they need to hand out paid vacation or sick time. For example, companies with more than 50 employees are subject to the The Family Medical Leave Act’s (FMLA) requirement that says companies need to give certain employees — pregnant folks, people caring for sick family members, and others — up to 12 weeks of unpaid leave each year. However, the United States is the only industrialized nation that doesn’t legally mandate any paid holiday or vacation days for employees.

That being said, many employers still offer PTO because they know how essential it is to the well-being of their team. Why? Because taking a step back and getting a refresh can help put things into perspective.

Sixty-three percent of employees view paid time off as one of the top three benefits that influences their job satisfaction, found the Society for Human Resource Management. Nearly four out of five HR pros also believe that people who take PTO are generally more excited about showing up for work every day. And finally, Project Time Off found that people who take their vacation are 6.5 percent more likely to snag a promotion. Happiness, satisfaction, career growth — those are just some of the benefits spouting out of PTO.

Some of the other findings Project Time Off found:

63 percent of people believe that PTO has a high impact on their job satisfaction

4 out of 5 HR pros say employees who take PTO are happier

80 percent of employees said they would be more likely to take PTO if their manager encouraged them to

Okay, I’m game. How do I design a plan?

Start off by reflecting on what matters to your company. Do you want to give your team a lot of autonomy? Do you want people to feel like true owners? Your answers to these questions should be grounded in what your company stands for and what makes sense for the type of business you run.

Before you start setting up your own PTO policy, here are the main things to think about:

Who is eligible?

How much time off should I give?

How should my team be able to accrue, or earn, time off?

What happens with any unused days?

What does my state say? (Many states, like California, encourage employees to get more out of their vacation time by requiring companies to compensate workers for any unused days.)

Who gets PTO?

Some companies provide PTO to both full- and part-time employees, while others only serve it up to full-timers. It really depends on the kind of culture you’re trying to create and how your policy can let that vision shine through.

How much time should employees get?

Once you decide who can get PTO, the next thing you need to figure out is the amount you want to dole out. But remember, that amount should apply to everyone across the board. Some companies go the unlimited vacation route, which opens up a whole new world of possibilities (and approaches) to get familiar with.

According to the U.S. Bureau of Labor Statistics, the average private industry worker in 2012 received 10 days of vacation, eight days of sick leave, and nine holidays for the first year of service. For those who worked for five years, they received 14 days of vacation, eight days of sick leave, and eight holidays. However, many companies go above that average to show their teams they really care about their lives outside of work.

How do they get it?

Next, figure out how your team should be able to accrue, or earn, their time off. With your PTO policy, you can either grant your team a lump sum of days, regardless of how long they’ve been at the company, or you can lock in an accrual policy. This is when employees have to accumulate days based on their tenure at the business.

If an employee hasn’t earned enough vacation days to take time off, some companies also allow folks to borrow against their plans.

If you go the unlimited route, your team doesn’t technically have to earn any days, but you should still write out your expectations (like how employees should communicate their plans), so no one is left scrambling in the eleventh hour.

A good way to motivate folks to take time is to have the leadership team go public about the days off they’re going to take. It helps cement the fact that others can do the same.

So what happens with all of those precious days that go unused? As an employer, it’s up to you to decide. Here’s an overview of the options you have:

Capping days This is when a company puts a cap, or limit, on how many days people can earn. Live in California? The state says that the cap can be 1.5 times the total you can earn in a year. So if you give out 20 days a year, your cap would be 30 days. Be sure to check with your state to see if they have any guidance on this aspect.

Carrying over days This is when you can let any unused vacation days dip into the following year.

Paying folks out for unused days If an employee doesn’t use all of their vacation days, many companies pay out the amount they earned when they leave the company. Depending on where your company is located, you may have to do just that, so definitely check in with your state’s labor office. For example, let’s say someone earns $400 a day and has eight days left of unused PTO. In that situation, they would get a check for $3,200 when they leave.

Once you nail down the plan design, make sure everything — from eligibility requirements to the way you can earn days — are clearly mapped out in your employee handbook. That way, your team will feel confident knowing exactly what their options are. And then, watch as those vacation vibes spread like sunbeams all across the office.

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Gusto’s mission is to create a world where work empowers a better life. By making the most complicated business tasks simple and personal, Gusto is reimagining payroll, benefits and HR for modern companies. Gusto serves over 60,000 companies nationwide and has offices in San Francisco and Denver.